Concerns of the Board of Directors

Daniel Kim |
Concerns of the Board of Directors

Board Members are always looking out for the well-being of the company. Being successful industry veterans, these individuals are aware of the potential pitfalls on the road to organizational success.

We often hear news of CEO’s resigning due to financial or operational irregularities (aka Volkswagen’s former CEO Martin Winterkorn’s resignation due to the emissions scandal) but we don’t hear much about the factors that were considered by the board before making such critical decisions. In those classically-designed, mahogany-furnished board rooms, there are some considerations that hold far more bearing on decisions than others. In this article, we will explore some of these important concerns.

Cybersecurity Breaches

Customers provide a lot of sensitive information to organizations, placing trust in the data storage systems. Additionally, every organization has critical internal data that gives them a competitive advantage in the market. If data such as credit card details, social security numbers, unpublished financials etc. is leaked to external sources it could have disastrous consequences. FBI now ranks cybercrime as one of its top law enforcement activities. Moreover, recent history has shown us that even large companies are not fully safeguarded from the threat of cybercrimes.

Regulatory Compliance Risk

In its annual Cost of Compliance survey, Reuters revealed that regulatory fatigue, resource challenges, and personal liability are expected to increase throughout 2015. These findings are a reflection of the sheer volume of regulatory change that continues to be anticipated, as firms navigate both international and domestic rules which have a global impact with resulting overlaps. The board has good reasons to be concerned about regulatory compliance because of increasing global operations and the ever-changing regulatory landscape.

Reputational Risk

Warren Buffett said “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” According to a 2012 study by World Economics, on average, approximately 25 percent of a company’s market value is directly attributable to its reputation. This is the reason that the board is so concerned about effectively managing reputation risk. Not surprisingly, when Forbes Insights on behalf of Deloitte surveyed executives, they found that 90 percent of executives believe that reputation risk is their key business challenge.

Crisis Management

A crisis can be any event that leads to an unstable and dangerous situation for the organization. Irrespective of whether you accept or deny the situation publicly, as a board or management, you definitely cannot ignore a crisis. Many large organizations such as G.M. and Penn State have realized the negative effects of acting slowly in a crisis and being in a constant state of denial. In this well-written article in Forbes about the Role of Boards in crisis, the author gives a ten point advice on how to handle crisis situations.

Corporate Governance risks in subsidiaries

Through the Enron scandal, the whole world saw how a lack of appropriate compliance checks in subsidiaries can spell doom for a giant company and a highly reputed audit firm. A big concern for board’s today is extending robust corporate governance practices and policies to subsidiaries. Subsidiaries’ activities can directly impact the reputation of the parent company, which does not have as much as visibility into the subsidiaries’ activities as it would like.

Mitigation: A strong risk management process that allows management to continuously identify, assess, and manage risks is the need of the hour. In many organizations, dynamic enterprise software has become an efficient tool to identify and nullify different types of irregularities before they cause long-term damage.

Daniel Kim

Daniel Kim, CPA, is co-founder and co-CEO at AuditBoard. Formerly global head of audit for two multibillion-dollar public companies, Daniel leverages his 15+ years of audit, risk, compliance, and SOX program consulting with hundreds of pre-IPO and public companies to deliver modern solutions for today’s corporate audit needs.

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